maverick, what you are missing in your evangelical defense of trend following is trend following has a specific definition and it is that definition that is being refered to when vishnu and i speak of trend following. trend following is buying new highs and selling new lows AND holding untill a supposed risk level is hit..... the risk level even existing is debateable based on the massive drawdowns these guys experience--but none the less--- that is what is called trend following. it is buy and hold or sell and hold and HOPE for the majority of traders. when the above method is tested on reams of equity products it severely underperforms. why would someone advocate a method that does not pass the test? the heroes of trend following fit nicely into surviorship bias--- they are/were the traders who survived and prospered while countless others failed. their evidence means nothing against the hard world of statistical reality. surfer
yes, and some people have the uncanny ability and vision to identify trends as they develop. because most people are unsuccesful or rather, incapable of it doesn't make it worthless. rather, it is perceived as worthless. the large increase of players in the trend fund arena implies that there will be more losers. most "trend followers" get involved at the end of the trend.
Thats truly funny Market Surfer. It's akin to refuting Poker as a viable game due to the # of losers at every table. Its actually worse than that because Poker is Zero Sum, trading isn't. You can make Equity Based Trend Following work like this: Up 40% on US Stocks year to date. Same thing on HKSE and TSE http://www.bumblebeecapital.com/system.html
Surf, I am not defending trend following. I personally do not follow it, but respect those that do. The numbers don't lie. And you are wrong about your one sided view of trend following being that you buy the highs. Most trend followers do not buy the highs, they buy the pullbacks or in the case of short positions, sell the bounces. Trend following is not the same as momentum trading and buying breakouts. You are confusing the two strategies. And trend followers do not have "RISK" levels as you call it. They wait until the trend has been broken. In fact, their risk is quite the opposite of what you think. Their risk is not directional risk as you assume, but rather non-directional risk. In other words, their returns will suffer the most from chop, not from being wrong about the direction of the trend. And their is no "HOPE" as you call it. It's actually very mathematical. You stay long or short the trend until the trend has been broken. No emotion, no hope, no hype. Trust me Surf, there is far more hope from long gamma and short gamma option traders then there is among trend followers. Hell, even the arbitrage players go to sleep every night hoping their deals don't fall through or hoping some statistical anomaly doesn't wipe them out. Usually all it takes is a small 100 basis pt move to completely blow up a highly leveraged arbitrage fund Surf. And one last thing, survivorship bias applies to ALL funds, not just trend following. In fact surf, the truth is, survivorship bias has actually impacted trend followers the least and arbitrage and long/short equity funds the most. Why? Simply because there are far more of them.
Soros and Druckenmiller are two of the greatest traders in the world, both major trendfollowers. I don't think either is the product of survivorship bias. One of the problems is that nobody really has a good definition of 'trend-following' as a strategy. It is more of a concept. Also, the term means nothing without a time-frame attached and due to the variety of potential time-frames, the strategy is extremely difficult to test statistically. Practioners frequently vary and change the time-frames depending upon market conditions, participants, hot money, etc. The strategy is not effective over the long-term by deploying a strictly static approach to the time-frame of the observed trend. It must be varied and adapted by a skilled practioner both qualitatively and quantitatively. Nobody can tell me that the odds of silver rallying or selling off going forward are about equal. Nor would I believe that about oil/energies either. If you think the odds of metals/energies rallying going forward are higher than selling off, you believe in trends (going forward being the ambigious time-frame that is more qualitative). If you see no difference between the potential future direction of Silver and the $/Eur, then you are not a believer (but I think you might be asleep). How you capture and keep the profits earned from that bias is another problem.
It's fairly well known that trend-following works in most markets... with the notable exception of equities (and equity indexes). Keith Fitschen, developer of the trend-following system Aberration, has done some interesting studies that show that equities are best traded counter-trend on a short timeframe, while all other markets are best traded with trend-following methodologies on a long timeframe. Has this always been the case? I don't know. I've heard that trend-following worked on equities prior to 1987, but haven't seen any studies backing this statement up.
When the Nasdaq and DJIA are at new highs will trend funds and trend trading still be extinct? I have not read the book yet.
I agree wholeheartedly. IMO, trends result from two factors - divergent fundamentals and widespread speculative participation. The later is a given (human nature). Equities are range bound because the economy is. Show me a hot economy that didn't produce commensurate equity trendiness. Second problem with the theory. Confining market behavior to an indefinite range bound bias would ultimately self destruct by definition. If the majority of participants can predict general market movement, the market will have become 'too predictable' - and by definition must change.